Interagency Advisory on Accounting for Deferred Compensation Agreements and Bank-Owned Life Insurance

Summary:

The federal banking agencies have issued an advisory letter that discusses the appropriate accounting and reporting for deferred compensation agreements, many of which are linked to investments in bank-owned life insurance. Banks should review their accounting for these agreements to ensure that they are being properly reported and make changes, if necessary, in their March 31, 2004, Call Reports.

The Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision have issued the attached Interagency Advisory on Accounting for Deferred Compensation Agreements and Bank-Owned Life Insurance. Many institutions have incorrectly accounted for their obligations under a type of deferred compensation agreement commonly referred to as a revenue neutral plan or an indexed retirement plan, the typical characteristics of which are described in the advisory. The benefits payable under these plans generally are based on the performance of bank-owned life insurance (BOLI) policies on these employees.

The agencies believe the guidance in the advisory on the appropriate accounting for deferred compensation agreements and BOLI is consistent with generally accepted accounting principles. The advisory also identifies the proper Call Report items in which to report information on these agreements and on BOLI. An appendix provides basic examples of one acceptable method of deferred compensation plan accounting.

Banks should review their accounting for deferred compensation agreements to ensure that their obligations to employees under these agreements have been properly measured and reported. Banks that do not have the necessary information about these agreements and the benefits to be paid to employees should contact the vendor that assisted in establishing the deferred compensation plans. Any necessary changes in a bank’s accounting for these agreements should be reflected in its March 31, 2004, Call Report. Corrections of material errors involving deferred compensation plan accounting should be reported as a prior period adjustment in the Call Report as described in the advisory. The FDIC will not request amendments to a bank’s previously filed Call Reports unless the magnitude of its deferred compensation plan accounting errors raises significant supervisory concerns about the institution.